Q2FY24 Review: Titan: Downgrade to ADD - positives priced in

6 Nov 2023 , 03:15 PM

Titan reported a strong set of numbers with jewellery (exbullion) growth of 19% and Ebit margin of 14.1%. However, diamond prices have deflated, which may result in pressure on margins due to inventory losses, the opposite of what happened a few quarters earlier. Moreover, lab grown diamonds, and increasing organised competition might pose risks to Titan in the medium term. Analysts of IIFL Capital Services cut their estimates by ~3-4% on account of the EPS dilution of the Caratlane acquisition. They cut rating to ADD, with price target Rs.3,350 (65x Sep 2025 EPS). 

Strong growth for the quarter: 

Jewellery business (ex-bullion) clocked growth of 19% YoY aided by new launches, healthy wedding demand and high value studded sales. Other segments also reported strong growth. The positive demand momentum of Q1 continued through Q2 in jewellery business and there was also positive impact of “Shraad” being delayed to October this year. Margins in jewellery (exbullion) of 14.1% contracted by 125bps YoY due to one-off effect of diamond price appreciation in Q2FY23 and was above analysts of IIFL Capital Services estimate. Watches ebit margin came in at 14.7% vs 14.8% YoY (13% IIFLe). Eyewear ebit margins came in 14.9% vs 16.8% YoY (16% IIFLe). 

Inventory losses a risk: 

Diamond prices are witnessing deflation, which may rewquire Titan to take some pricing correction and lead to inventory losses. While the company has mentioned that the impact will not be material, this is still a risk in analysts of IIFL Capital Services view. A few quarters ago, inflation in diamond prices resulted in ~200 bps margin expansion on account of inventory gains. 

Valuation a constraint in light of risks: 

Lab grown diamonds may result in more deflation in diamond prices, impacting margins and sales for Titan in the medium term. However, it is not clear if the trend will catch on in India, hence not an immediate risk. Moreover, organised jewellery players are expanding rapidly, even as formalisation accelerates. Lastly, despite building in 21% EPS Cagr FY24-26, 65x Sep 2025 yields a price target of Rs.3,350 and we downgrade to ADD.